Introducing Loan Builder, A Free Loan Pricing Tool
About a month ago, we did a sneak preview of a new service we are offering (free of charge) in a post about loan pricing. We are calling it LOAN BUILDER:
We designed this tool to solve some of the recurring problems we see in fixed rate loan pricing in community banks. These include:
- Community banks are often slow to update rates, usually because updating a pricing sheet is a manual process. Loan Builder will be updated weekly on this site, so using it will make sure that your lenders are using current rates.
- Lenders often set their own rates, leading to inconsistency between lenders and markets.
- Banks often fail to take into account the current yield curve, and will overprice some points in the curve while underpricing others. This causes a bank to inadvertently drive borrowers to this one spot on the curve while losing good deals to competitors. Loan Builder uses the LIBOR swaps curve, creating consistency. A bank can set a target spread over LIBOR (Total Credit Spread on this tool), and then all pricing is equal in terms of return no matter where on the yield curve it is priced.
- Banks often fail to differentiate pricing based on amortization schedules, which can dramatically impact the duration and risk. Loan Builder includes the amortization schedule in the analysis (and in the duration calculation at the bottom of page), so that a 10 year fully amortizing loan is priced cheaper than a 10 year balloon with a 20 year amortization.
- Very few community banks properly handle prepayment penalties. This is a quantifiable risk that banks are taking, and they usually give away this valuable option for free. While removing prepayment penalties may be necessary for competitive reasons, the bank should at least be aware of how much this option is worth due to the impact on the risk profile (a loan that can be prepaid has far more interest rate risk because the bank loses as rates rise AND as rates fall when the borrower prepays). Loan Builder calculates this in terms of yield depending on how much lockout is included int he loan. This way a lender can offer a borrower two rates - one that is freely prepayable and one that has prepayment penalties. If priced properly, the borrower can choose and the bank is indifferent.
- Finally, we have seen many more community banks consider the use of interest rate swaps to hedge the growing risk on their balance sheets. However, getting pricing on these deals is next to impossible without a Bloomberg terminal or an established relationship with a swap dealer. Loan Builder will allow banks to see how their fixed rate loan would swap to variable - the Total Credit Spread at the bottom would be the spread over 1 month LIBOR using a swap based on the structure details provided (contact us about Flex Loan for more details on this process).
You can access Loan Builder at any time on our website (click the tab on the top row or the box on the top left). Contact AMG for a more detailed discussion on how your loan pricing is impacting your interest rate risk, loan portfolio production and profitability, or how to use swaps to hedge your risk. You can fill out the contact form here, email us, or call us at (800) 226-1923.